You are trying to diversify your portfolio and reduce risk. Which of the following correlations between the returns of your portfolio and those of a proposed addition would give the most diversification benefit (other things equal)?
A) - .5
B) +1
C) 0
D) - 1

Question

Quizplus · Accepted Answer

A correlation of -1 between the returns of your portfolio and a proposed addition means that they move in exactly opposite directions. This provides the maximum diversification benefit by reducing overall portfolio risk.

You Are Trying to Diversify Your Portfolio and Reduce Risk